Evolution: Locational Pricing, A Key Component of Effective Market Design

1
Evolution Locational Pricing, A Key Component
of Effective Market Design
Dorothea Stockstill, Texas Manager, Market
Affairs Mirant Energy Marketing, L.P. January
14, 2003
2
Components of an Effective Market Design

• Transmission Adequacy
• Grid Access
• Financial Transmission Rights (TCRs / Hedges)
• Planning /Expansion
• Generation Adequacy
• Forward Markets
• Real-time Energy Market and Day-ahead Energy
  Market
• Ancillary Services Markets
• Capacity Market
• Congestion Management
• Transparent price signals through locational
  pricing
• Appropriate Role for Demand Response
• Market Monitoring/PUCT Oversight

3
Evaluating the Cost of Changing vs. the Cost of
Not Changing

• Benefits to Consumers of changing the ERCOT
  Market Design should be carefully evaluated
• Costs to Consumers of not evolving to a more
  competitive market structure should also be
  evaluated
• Stakeholders and the PUCT need additional data to
  make an accurate comparison
• Incremental changes without an end state in mind
  are likely to be more costly than deciding on a
  framework and evolving to a defined end state
• Long term benefits to consumers should be the
  ultimate goal of the market design process

4
Congestion Management Issues in ERCOT

• CSC congestion model or a congestion model with
  more granularity through locational pricing
• Managing local congestion through direct
  assignment and appropriate price mitigation
• Wind generation related congestion
• Transmission vs. generation solutions through
  coordination of transmission planning function by
  ERCOT
• Generation interconnection and effective,
  transparent price signals

5
Market Design Issues Related to Congestion
Management

• Centralized day-ahead energy market
• Market power mitigation
• The need for and procurement of RMR units
• Transmission planning, as related to pricing of
  a. Transmission constraints b. Nodes / hubs /
  zones
• Market Design is an Open System Concept - An
  Interrelationship exists among the Components

6
Benefits of Day-Ahead Market

• Can enhance ability of ERCOT to manage
  reliability
• In the short term there is no distinction between
  energy dispatch and transmission use
• Reliability is better served by the additional
  transparency of locational pricing
• ERCOT can incorporate DA information in
  reliability assessment
• ERCOT needs to be able to commit units in the
  correct locations to balance real-time demand and
  resources, manage congestion and provide
  sufficient locational reserves

7
Market Power Mitigation and Congestion Management

• Market power mitigation may be required under
  either zonal or nodal congestion management
  models
• Market power is not solved through congestion
  management mechanisms
• Structured prices may be utilized to resolve
  local market power but the rules must be clear
  to market participants in advance of decision
  making regarding their transactions
• Market power mitigation should not be a
  substitute for a market design that provides
  appropriate incentives, transparency in pricing,
  and rules that are fair to all market
  participants

8
Need for and Procurement of RMR Units

• RMR contracts should be executed based on a set
  of verifiable criteria clearly defined in the
  Protocols
• ERCOT should evaluate such criteria to determine
  the need for an RMR agreement and negotiate the
  contract with the RMR unit owner.
• Increased price transparency will enable ERCOT to
  determine when a transmission solution is more
  efficient that an RMR agreement
• Locational pricing data should be considered in
  making the decision to build additional
  transmission or sign an RMR contract

9
Transition of Transmission Planning Function in
ERCOT

• New paradigm for transmission planning must
  address confidentiality issues related to sharing
  of data between generation developers and
  transmission planners
• ERCOT should help identify technology solutions
  that can be implemented by TDSPs to help
  eliminate congestion
• Recognize environmental effects and other
  externalities
• Need for effective price signals in coordinating
  generation and transmission alternatives
• Transparency provided by locational pricing data
  can help ERCOT independently verify data to
  determine the economic benefit of a transmission
  project

10
In Summary

• Competition is working but not as well as we
  believe it could
• Reliability is better served by more transparency
  through locational pricing
• Properly designed market structure is key to
  improving competitiveness and each component is
  related
• Fair rules and competitive markets benefit market
  participants and consumers
• More data is necessary to adequately evaluate
  options before reaching a decision on market
  framework
• When PUCT decides on framework, PUCT and Market
  Participants should collaborate on an
  implementation strategy